Both stocks and bonds benefitted from good news across the earnings, macroeconomic, and geopolitical fronts today. Financial stocks jumped as big banks kicked off Q4 earnings season with better-than-expected results, and the S&P 500 rose 1.8%. Treasuries rallied, as December's CPI was a bit cooler than feared. And Israel and Hamas have agreed to a ceasefire after 15 long months of fighting.
Both stocks and bonds benefitted from good news across the earnings, macroeconomic, and geopolitical fronts today. Financial stocks jumped as big banks kicked off Q4 earnings season with better-than-expected results, and the S&P 500 rose 1.8%. Treasuries rallied, as December's CPI was a bit cooler than feared. And Israel and Hamas have agreed to a ceasefire after 15 long months of fighting.
We anticipated that Trump 2.0 would be positive for the geopolitical scene, despite the overwhelming chatter about tariffs upsetting global trade. On November 12, following Trump's electoral win, we wrote: "We believe Trump 2.0 represents a major regime change that’s bullish for the economy and stocks. We now expect a sooner end to current geopolitical crises and possibly some improvement in the fiscal situation..."
Here's more on today's developments:
(1) Bull/Bear Ratio. In the December 18, 2024 QuickTakes, we noted that Investors Intelligence’s Bull/Bear Ratio rose to a very bullish 3.80 reading, which we noted was a short-term sell signal from a contrarian perspective. After this past Friday's sharp stock market selloff, we expected to see the ratio fall sharply, which it did, down to 1.32 (chart). We reckon today's sharp rally reflected lots of short covering on a cooler-than-expected CPI report.
(2) Financials. We entered the current earnings reporting season expecting 10.0% y/y earnings growth for the S&P 500 companies in aggregate, above analysts' expected 8.2% (chart). Today, shares of JPMorgan, Goldman Sachs, Citigroup, Wells Fargo, and BlackRock all rose after reporting strong Q4 earnings before the market’s open. The Financial Select Sector SPDR Fund (ticker: XLF) rose 2.5%. We continue to recommend overweighting Financials, especially now that Trump 2.0 is likely to ease bank regulations.
(3) CPI. In December, a jump in energy prices drove nearly half of the 0.4% m/m increase in headline CPI inflation (2.9% y/y), while core CPI inflation rose just 0.2% m/m (3.2% y/y). The latest CPI report didn't change much for the overall inflation picture. Services inflation still appears to be stuck too high above the Fed's 2.0% inflation target (chart). Stripping out food and energy, goods prices continued to fall last month, but at a slower pace (chart).
The tamer monthly increase in core CPI sparked a lot of bond buying. We've been writing that the demand for bonds would strengthen as the 10-year Treasury bond yield approached 5%, and we're sticking with our range of 4.25%-4.75% for 2025. Today, this yield fell from 4.78% to 4.66% (chart).
(4) Oil. Rising energy prices boosted both December's PPI and CPI and will feed into the month's headline PCED. Energy inflation is likely to continue in January, as the Biden administration's latest sanctions on Russia have boosted crude oil prices. Despite the good news in the Middle East, a barrel of Brent crude rose more than 3% today to $82.03 (chart).
However, we think there's more downside risk to oil prices in the coming months. The Trump administration will likely set its sights on resolving the conflict between Russia and Ukraine. Land leases, LNG plant approvals, and deregulation for drilling will help subdue energy prices. China's economic weakness, resulting from the ongoing property market depression, will also keep a lid on oil demand.
(5) Bitcoin. Overall, it was a risk-on day, as evidenced by the rebound in bitcoin back over $100,000. The cryptocurrency is highly correlated with ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) which invests in the Nasdaq-100 with triple leverage (chart).
